BKLM331600 - Chargeable equity and liabilities: excluded equity and liabilities: cash collateral provided as QCP margin

Paragraph 38A of Schedule 19

As part of the regulatory reform agenda, there is a drive to introduce central clearing of derivatives via regulated central counterparties (CCPs) as central clearing enhances asset protection, mitigates counterparty risk and improves market transparency.

For chargeable periods ending on or after 1 January 2014, liabilities recognised in respect of cash collateral provided as Qualifying Central Counterparty (‘QCP’) margin in relation to a trade executed or to be executed under a client clearing agreement will be excluded. The aim of this exclusion is to ensure there is no disincentive for banks to facilitate their client’s clearing transactions.

The amount that can be excluded as QCP margin is the cash collateral that exceeds the fair value of the underlying traded instrument, and relates to an asset (or reduced liability) arising from collateral passed on to the QCP.

For example: A bank receives 100 of initial margin from a customer (cash collateral), which is passed on to the QCP. The 100 is in excess of the fair value of the underlying traded instrument. (The fair value is treated as nil). The 100 relates to an asset held in respect of the QCP, and so should be excluded from the bank levy calculation.

For the purpose of this exclusion:

• A QCP is a central counterparty that has been either authorised or recognised under the EMIR Regulation (Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories)
• A ‘client clearing agreement’ is a contract between a clearing member of a QCP and a client, relating to the clearing of transactions with the QCP.
• ‘Clearing member’ and ‘client’ are defined in Articles 2(14) and 2(15) of the EMIR Regulation, respectively.